You are on page 1of 28

INTERNATIONAL STANDARD ON AUDITING 705

MODIFICATIONS TO THE OPINION IN THE


INDEPENDENT AUDITOR’S REPORT
(Effective for audits of financial statements for periods
beginning on or after December 15, 2009)

CONTENTS
Paragraphs
Introduction
Scope of this ISA ........................................................................................ 1
Types of Modified Opinions ....................................................................... 2
Effective Date ............................................................................................. 3
Objective .................................................................................................... 4
Definitions .................................................................................................. 5
Requirements
Circumstances When a Modification to the Auditor’s Opinion is
Required ............................................................................................... 6
Determining the Type of Modification to the Auditor’s Opinion ............... 7−15
Form and Content of the Auditor’s Report When the Opinion is
Modified .............................................................................................. 16−27
Communication with Those Charged with Governance ............................. 28
Application and Other Explanatory Material
Types of Modified Opinions ....................................................................... A1
Nature of Material Misstatements ............................................................... A2−A7
Nature of an Inability to Obtain Sufficient Appropriate Audit
Evidence .............................................................................................. A8−A12
Consequence of an Inability to Obtain Sufficient Appropriate Audit
Evidence Due to a Management-Imposed Limitation after the
Auditor Has Accepted the Engagement .................................................. A13−A15
Other Considerations Relating to an Adverse Opinion or Disclaimer
of Opinion ............................................................................................ A16
Form and Content of the Auditor’s Report When the Opinion is
Modified .............................................................................................. A17−A24

682 ISA 705


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Communication with Those Charged with Governance ............................. A25


Appendix: Illustrations of Auditors’ Reports with Modifications
to the Opinion

International Standard on Auditing (ISA) 705 “Modifications to the Opinion in


the Independent Auditor’s Report” should be read in conjunction with ISA 200
“Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with International Standards on Auditing.”

AUDITING

683 ISA 705


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Introduction
Scope of this ISA
1. This International Standard on Auditing (ISA) deals with the auditor’s
responsibility to issue an appropriate report in circumstances when, in forming
an opinion in accordance with ISA 700,1 the auditor concludes that a
modification to the auditor’s opinion on the financial statements is necessary.

Types of Modified Opinions


2. This ISA establishes three types of modified opinions, namely, a qualified
opinion, an adverse opinion, and a disclaimer of opinion. The decision
regarding which type of modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification, that is,
whether the financial statements are materially misstated or, in the
case of an inability to obtain sufficient appropriate audit evidence,
may be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the effects or possible
effects of the matter on the financial statements. (Ref: Para. A1)

Effective Date
3. This ISA is effective for audits of financial statements for periods beginning
on or after December 15, 2009.

Objective
4. The objective of the auditor is to express clearly an appropriately modified
opinion on the financial statements that is necessary when:
(a) The auditor concludes, based on the audit evidence obtained, that the
financial statements as a whole are not free from material misstatement;
or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement.

Definitions
5. For purposes of the ISAs, the following terms have the meanings attributed
below:
(a) Pervasive – A term used, in the context of misstatements, to describe
the effects on the financial statements of misstatements or the
possible effects on the financial statements of misstatements, if any,

1
ISA 700, “Forming an Opinion and Reporting on Financial Statements.”

ISA 705 684


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

that are undetected due to an inability to obtain sufficient appropriate


audit evidence. Pervasive effects on the financial statements are those
that, in the auditor’s judgment:
(i) Are not confined to specific elements, accounts or items of the
financial statements;
(ii) If so confined, represent or could represent a substantial
proportion of the financial statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding
of the financial statements.
(b) Modified opinion – A qualified opinion, an adverse opinion or a
disclaimer of opinion.

Requirements
Circumstances When a Modification to the Auditor’s Opinion Is Required
6. The auditor shall modify the opinion in the auditor’s report when:
(a) The auditor concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material misstatement;
or (Ref: Para. A2–A7)
(b) The auditor is unable to obtain sufficient appropriate audit evidence
to conclude that the financial statements as a whole are free from
material misstatement. (Ref: Para. A8–A12)

Determining the Type of Modification to the Auditor’s Opinion


Qualified Opinion
7. The auditor shall express a qualified opinion when:

AUDITING
(a) The auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements, individually or in the aggregate, are
material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, but the auditor concludes that the possible
effects on the financial statements of undetected misstatements, if any,
could be material but not pervasive.

Adverse Opinion
8. The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements, individually
or in the aggregate, are both material and pervasive to the financial statements.

685 ISA 705


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Disclaimer of Opinion
9. The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and the
auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive.
10. The auditor shall disclaim an opinion when, in extremely rare circumstances
involving multiple uncertainties, the auditor concludes that, notwithstanding
having obtained sufficient appropriate audit evidence regarding each of the
individual uncertainties, it is not possible to form an opinion on the financial
statements due to the potential interaction of the uncertainties and their
possible cumulative effect on the financial statements.

Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to


a Management-Imposed Limitation after the Auditor Has Accepted the Engagement
11. If, after accepting the engagement, the auditor becomes aware that
management has imposed a limitation on the scope of the audit that the
auditor considers likely to result in the need to express a qualified opinion or
to disclaim an opinion on the financial statements, the auditor shall request
that management remove the limitation.
12. If management refuses to remove the limitation referred to in paragraph 11,
the auditor shall communicate the matter to those charged with governance,
unless all of those charged with governance are involved in managing the
entity, 2 and determine whether it is possible to perform alternative procedures
to obtain sufficient appropriate audit evidence.
13. If the auditor is unable to obtain sufficient appropriate audit evidence, the
auditor shall determine the implications as follows:
(a) If the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not
pervasive, the auditor shall qualify the opinion; or
(b) If the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be both material
and pervasive so that a qualification of the opinion would be inadequate
to communicate the gravity of the situation, the auditor shall:
(i) Withdraw from the audit, where practicable and possible under
applicable law or regulation; or (Ref: Para. A13–A14)
(ii) If withdrawal from the audit before issuing the auditor’s report is
not practicable or possible, disclaim an opinion on the financial
statements.
2
ISA 260, “Communication with Those Charged with Governance,” paragraph 13.

ISA 705 686


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

14. If the auditor withdraws as contemplated by paragraph 13(b)(i), before


withdrawing, the auditor shall communicate to those charged with governance
any matters regarding misstatements identified during the audit that would
have given rise to a modification of the opinion. (Ref: Para. A15)

Other Considerations Relating to an Adverse Opinion or Disclaimer of Opinion


15. When the auditor considers it necessary to express an adverse opinion or
disclaim an opinion on the financial statements as a whole, the auditor’s
report shall not also include an unmodified opinion with respect to the same
financial reporting framework on a single financial statement or one or more
specific elements, accounts or items of a financial statement. To include
such an unmodified opinion in the same report3 in these circumstances
would contradict the auditor’s adverse opinion or disclaimer of opinion on
the financial statements as a whole. (Ref: Para. A16)

Form and Content of the Auditor’s Report When the Opinion Is Modified
Basis for Modification Paragraph
16. When the auditor modifies the opinion on the financial statements, the
auditor shall, in addition to the specific elements required by ISA 700,
include a paragraph in the auditor’s report that provides a description of the
matter giving rise to the modification. The auditor shall place this paragraph
immediately before the opinion paragraph in the auditor’s report and use the
heading “Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or
“Basis for Disclaimer of Opinion,” as appropriate. (Ref: Para. A17)
17. If there is a material misstatement of the financial statements that relates to
specific amounts in the financial statements (including quantitative disclosures),
the auditor shall include in the basis for modification paragraph a description
and quantification of the financial effects of the misstatement, unless

AUDITING
impracticable. If it is not practicable to quantify the financial effects, the auditor
shall so state in the basis for modification paragraph. (Ref: Para. A18)
18. If there is a material misstatement of the financial statements that relates to
narrative disclosures, the auditor shall include in the basis for modification
paragraph an explanation of how the disclosures are misstated.
19. If there is a material misstatement of the financial statements that relates to
the non-disclosure of information required to be disclosed, the auditor shall:
(a) Discuss the non-disclosure with those charged with governance;

3
ISA 805, “Special Considerations—Audits of Single Financial Statements and Specific Elements,
Accounts or Items of a Financial Statement,” deals with circumstances where the auditor is
engaged to express a separate opinion on one or more specific elements, accounts or items of a
financial statement.

687 ISA 705


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

(b) Describe in the basis for modification paragraph the nature of the omitted
information; and
(c) Unless prohibited by law or regulation, include the omitted disclosures,
provided it is practicable to do so and the auditor has obtained sufficient
appropriate audit evidence about the omitted information. (Ref: Para.
A19)
20. If the modification results from an inability to obtain sufficient appropriate audit
evidence, the auditor shall include in the basis for modification paragraph the
reasons for that inability.
21. Even if the auditor has expressed an adverse opinion or disclaimed an opinion
on the financial statements, the auditor shall describe in the basis for
modification paragraph the reasons for any other matters of which the auditor is
aware that would have required a modification to the opinion, and the effects
thereof. (Ref: Para. A20)

Opinion Paragraph
22. When the auditor modifies the audit opinion, the auditor shall use the heading
“Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as
appropriate, for the opinion paragraph. (Ref: Para. A21, A23–A24)
23. When the auditor expresses a qualified opinion due to a material misstatement in
the financial statements, the auditor shall state in the opinion paragraph that, in
the auditor’s opinion, except for the effects of the matter(s) described in the
Basis for Qualified Opinion paragraph:
(a) The financial statements present fairly, in all material respects (or give a
true and fair view) in accordance with the applicable financial reporting
framework when reporting in accordance with a fair presentation
framework; or
(b) The financial statements have been prepared, in all material respects, in
accordance with the applicable financial reporting framework when
reporting in accordance with a compliance framework.
When the modification arises from an inability to obtain sufficient appropriate
audit evidence, the auditor shall use the corresponding phrase “except for the
possible effects of the matter(s) ...” for the modified opinion. (Ref: Para. A22)
24. When the auditor expresses an adverse opinion, the auditor shall state in the
opinion paragraph that, in the auditor’s opinion, because of the significance of
the matter(s) described in the Basis for Adverse Opinion paragraph:
(a) The financial statements do not present fairly (or give a true and fair
view) in accordance with the applicable financial reporting framework
when reporting in accordance with a fair presentation framework; or

ISA 705 688


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

(b) The financial statements have not been prepared, in all material respects,
in accordance with the applicable financial reporting framework when
reporting in accordance with a compliance framework.
25. When the auditor disclaims an opinion due to an inability to obtain sufficient
appropriate audit evidence, the auditor shall state in the opinion paragraph that:
(a) Because of the significance of the matter(s) described in the Basis for
Disclaimer of Opinion paragraph, the auditor has not been able to obtain
sufficient appropriate audit evidence to provide a basis for an audit
opinion; and, accordingly,
(b) The auditor does not express an opinion on the financial statements.

Description of Auditor’s Responsibility When the Auditor Expresses a Qualified or


Adverse Opinion
26. When the auditor expresses a qualified or adverse opinion, the auditor shall
amend the description of the auditor’s responsibility to state that the auditor
believes that the audit evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditor’s modified audit opinion.

Description of Auditor’s Responsibility When the Auditor Disclaims an Opinion


27. When the auditor disclaims an opinion due to an inability to obtain sufficient
appropriate audit evidence, the auditor shall amend the introductory paragraph
of the auditor’s report to state that the auditor was engaged to audit the financial
statements. The auditor shall also amend the description of the auditor’s
responsibility and the description of the scope of the audit to state only the
following: “Our responsibility is to express an opinion on the financial
statements based on conducting the audit in accordance with International
Standards on Auditing. Because of the matter(s) described in the Basis for

AUDITING
Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion.”

Communication with Those Charged with Governance


28. When the auditor expects to modify the opinion in the auditor’s report, the
auditor shall communicate with those charged with governance the
circumstances that led to the expected modification and the proposed
wording of the modification. (Ref: Para. A25)

***

689 ISA 705


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Application and Other Explanatory Material


Types of Modified Opinions (Ref: Para. 2)
A1. The table below illustrates how the auditor’s judgment about the nature of
the matter giving rise to the modification, and the pervasiveness of its
effects or possible effects on the financial statements, affects the type of
opinion to be expressed.

Auditor’s Judgment about the Pervasiveness of the


Effects or Possible Effects on the Financial
Statements

Nature of Matter Giving Material but Not Material and Pervasive


Rise to the Modification Pervasive

Financial statements are


Qualified opinion Adverse opinion
materially misstated

Inability to obtain
sufficient appropriate audit Qualified opinion Disclaimer of opinion
evidence

Nature of Material Misstatements (Ref: Para. 6(a))


A2. ISA 700 requires the auditor, in order to form an opinion on the financial
statements, to conclude as to whether reasonable assurance has been
obtained about whether the financial statements as a whole are free from
material misstatement.4 This conclusion takes into account the auditor’s
evaluation of uncorrected misstatements, if any, on the financial statements
in accordance with ISA 450.5
A3. ISA 450 defines a misstatement as a difference between the amount,
classification, presentation, or disclosure of a reported financial statement
item and the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial
reporting framework. Accordingly, a material misstatement of the financial
statements may arise in relation to:
(a) The appropriateness of the selected accounting policies;
(b) The application of the selected accounting policies; or
(c) The appropriateness or adequacy of disclosures in the financial
statements.

4
ISA 700, paragraph 11.
5
ISA 450, “Evaluation of Misstatements Identified during the Audit,” paragraph 11.

ISA 705 690


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Appropriateness of the Selected Accounting Policies


A4. In relation to the appropriateness of the accounting policies management has
selected, material misstatements of the financial statements may arise when:
(a) The selected accounting policies are not consistent with the
applicable financial reporting framework; or
(b) The financial statements, including the related notes, do not represent the
underlying transactions and events in a manner that achieves fair
presentation.
A5. Financial reporting frameworks often contain requirements for the
accounting for, and disclosure of, changes in accounting policies. Where the
entity has changed its selection of significant accounting policies, a material
misstatement of the financial statements may arise when the entity has not
complied with these requirements.

Application of the Selected Accounting Policies


A6. In relation to the application of the selected accounting policies, material
misstatements of the financial statements may arise:
(a) When management has not applied the selected accounting policies
consistently with the financial reporting framework, including when
management has not applied the selected accounting policies consistently
between periods or to similar transactions and events (consistency in
application); or
(b) Due to the method of application of the selected accounting policies
(such as an unintentional error in application).

Appropriateness or Adequacy of Disclosures in the Financial Statements

AUDITING
A7. In relation to the appropriateness or adequacy of disclosures in the financial
statements, material misstatements of the financial statements may arise when:
(a) The financial statements do not include all of the disclosures required
by the applicable financial reporting framework;
(b) The disclosures in the financial statements are not presented in
accordance with the applicable financial reporting framework; or
(c) The financial statements do not provide the disclosures necessary to
achieve fair presentation.

Nature of an Inability to Obtain Sufficient Appropriate Audit Evidence (Ref:


Para. 6(b))
A8. The auditor’s inability to obtain sufficient appropriate audit evidence (also
referred to as a limitation on the scope of the audit) may arise from:

691 ISA 705


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

(a) Circumstances beyond the control of the entity;


(b) Circumstances relating to the nature or timing of the auditor’s work; or
(c) Limitations imposed by management.
A9. An inability to perform a specific procedure does not constitute a limitation on
the scope of the audit if the auditor is able to obtain sufficient appropriate audit
evidence by performing alternative procedures. If this is not possible, the
requirements of paragraphs 7(b) and 10 apply as appropriate. Limitations
imposed by management may have other implications for the audit, such as for
the auditor’s assessment of fraud risks and consideration of engagement
continuance.
A10. Examples of circumstances beyond the control of the entity include when:
• The entity’s accounting records have been destroyed.
• The accounting records of a significant component have been seized
indefinitely by governmental authorities.
A11. Examples of circumstances relating to the nature or timing of the auditor’s
work include when:
• The entity is required to use the equity method of accounting for an
associated entity, and the auditor is unable to obtain sufficient
appropriate audit evidence about the latter’s financial information to
evaluate whether the equity method has been appropriately applied.
• The timing of the auditor’s appointment is such that the auditor is
unable to observe the counting of the physical inventories.
• The auditor determines that performing substantive procedures alone
is not sufficient, but the entity’s controls are not effective.
A12. Examples of an inability to obtain sufficient appropriate audit evidence arising
from a limitation on the scope of the audit imposed by management include
when:
• Management prevents the auditor from observing the counting of the
physical inventory.
• Management prevents the auditor from requesting external confirmation
of specific account balances.

Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence


Due to a Management-Imposed Limitation after the Auditor Has Accepted the
Engagement (Ref: Para. 13(b)–14)
A13. The practicality of withdrawing from the audit may depend on the stage of
completion of the engagement at the time that management imposes the scope
limitation. If the auditor has substantially completed the audit, the auditor may

ISA 705 692


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

decide to complete the audit to the extent possible, disclaim an opinion and
explain the scope limitation in the Basis for Disclaimer of Opinion paragraph
prior to withdrawing.
A14. In certain circumstances, withdrawal from the audit may not be possible if the
auditor is required by law or regulation to continue the audit engagement. This
may be the case for an auditor that is appointed to audit the financial statements
of public sector entities. It may also be the case in jurisdictions where the auditor
is appointed to audit the financial statements covering a specific period, or
appointed for a specific period and is prohibited from withdrawing before the
completion of the audit of those financial statements or before the end of that
period, respectively. The auditor may also consider it necessary to include an
Other Matter paragraph in the auditor’s report.6
A15. When the auditor concludes that withdrawal from the audit is necessary because
of a scope limitation, there may be a professional, legal or regulatory
requirement for the auditor to communicate matters relating to the withdrawal
from the engagement to regulators or the entity’s owners.

Other Considerations Relating to an Adverse Opinion or Disclaimer of Opinion


(Ref: Para. 15)
A16. The following are examples of reporting circumstances that would not
contradict the auditor’s adverse opinion or disclaimer of opinion:
• The expression of an unmodified opinion on financial statements
prepared under a given financial reporting framework and, within the
same report, the expression of an adverse opinion on the same
financial statements under a different financial reporting framework.7
• The expression of a disclaimer of opinion regarding the results of
operations, and cash flows, where relevant, and an unmodified

AUDITING
opinion regarding the financial position (see ISA 5108). In this case,
the auditor has not expressed a disclaimer of opinion on the financial
statements as a whole.

Form and Content of the Auditor’s Report When the Opinion Is Modified
Basis for Modification Paragraph (Ref: Para. 16–17, 19, 21)
A17. Consistency in the auditor’s report helps to promote users’ understanding and to
identify unusual circumstances when they occur. Accordingly, although
uniformity in the wording of a modified opinion and in the description of the

6
ISA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s
Report,” paragraph A5.
7
See paragraph A32 of ISA 700 for a description of this circumstance.
8
ISA 510, “Initial Audit Engagements―Opening Balances,” paragraph 10.

693 ISA 705


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

basis for the modification may not be possible, consistency in both the form and
content of the auditor’s report is desirable.
A18. An example of the financial effects of material misstatements that the
auditor may describe in the basis for modification paragraph in the auditor’s
report is the quantification of the effects on income tax, income before
taxes, net income and equity if inventory is overstated.
A19. Disclosing the omitted information in the basis for modification paragraph
would not be practicable if:
(a) The disclosures have not been prepared by management or the
disclosures are otherwise not readily available to the auditor; or
(b) In the auditor’s judgment, the disclosures would be unduly voluminous
in relation to the auditor’s report.
A20. An adverse opinion or a disclaimer of opinion relating to a specific matter
described in the basis for qualification paragraph does not justify the
omission of a description of other identified matters that would have
otherwise required a modification of the auditor’s opinion. In such cases, the
disclosure of such other matters of which the auditor is aware may be
relevant to users of the financial statements.

Opinion Paragraph (Ref: Para. 22–23)


A21. Inclusion of this paragraph heading makes it clear to the user that the
auditor’s opinion is modified and indicates the type of modification.
A22. When the auditor expresses a qualified opinion, it would not be appropriate
to use phrases such as “with the foregoing explanation” or “subject to” in
the opinion paragraph as these are not sufficiently clear or forceful.

Illustrative Auditors’ Reports


A23. Illustrations 1 and 2 in the Appendix contain auditors’ reports with qualified
and adverse opinions, respectively, as the financial statements are materially
misstated.
A24. Illustration 3 in the Appendix contains an auditor’s report with a qualified
opinion as the auditor is unable to obtain sufficient appropriate audit evidence.
Illustration 4 contains a disclaimer of opinion due to an inability to obtain
sufficient appropriate audit evidence about a single element of the financial
statements. Illustration 5 contains a disclaimer of opinion due to an inability to
obtain sufficient appropriate audit evidence about multiple elements of the
financial statements. In each of the latter two cases, the possible effects on the
financial statements of the inability are both material and pervasive.

ISA 705 694


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Communication with Those Charged with Governance (Ref: Para. 28)


A25. Communicating with those charged with governance the circumstances that
lead to an expected modification to the auditor’s opinion and the proposed
wording of the modification enables:
(a) The auditor to give notice to those charged with governance of the
intended modification(s) and the reasons (or circumstances) for the
modification(s);
(b) The auditor to seek the concurrence of those charged with governance
regarding the facts of the matter(s) giving rise to the expected
modification(s), or to confirm matters of disagreement with management
as such; and
(c) Those charged with governance to have an opportunity, where
appropriate, to provide the auditor with further information and
explanations in respect of the matter(s) giving rise to the expected
modification(s).

AUDITING

695 ISA 705


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Appendix
(Ref: Para. A23–24)

Illustrations of Auditors’ Reports with Modifications to the


Opinion
• Illustration 1: An auditor’s report containing a qualified opinion due to a material
misstatement of the financial statements.
• Illustration 2: An auditor’s report containing an adverse opinion due to a material
misstatement of the financial statements.
• Illustration 3: An auditor’s report containing a qualified opinion due to the
auditor’s inability to obtain sufficient appropriate audit evidence.
• Illustration 4: An auditor’s report containing a disclaimer of opinion due to the
auditor’s inability to obtain sufficient appropriate audit evidence about a single
element of the financial statements.
• Illustration 5: An auditor’s report containing a disclaimer of opinion due to the
auditor’s inability to obtain sufficient appropriate audit evidence about multiple
elements of the financial statements.

ISA 705 APPENDIX 696


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Illustration 1:
Circumstances include the following:
• Audit of a complete set of general purpose financial statements
prepared by management of the entity in accordance with International
Financial Reporting Standards.
• The terms of the audit engagement reflect the description of
management’s responsibility for the financial statements in ISA 210.1
• Inventories are misstated. The misstatement is deemed to be material
but not pervasive to the financial statements.
• In addition to the audit of the financial statements, the auditor has other
reporting responsibilities required under local law.

INDEPENDENT AUDITOR’S REPORT


[Appropriate Addressee]
Report on the Financial Statements2
We have audited the accompanying financial statements of ABC Company, which
comprise the statement of financial position as at December 31, 20X1, and the statement
of comprehensive income, statement of changes in equity and statement of cash flows for
the year then ended, and a summary of significant accounting policies and other
explanatory information.

Management’s3 Responsibility for the Financial Statements


Management is responsible for the preparation and fair presentation of these
financial statements in accordance with International Financial Reporting Standards,4

AUDITING
and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error.

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our
audit. We conducted our audit in accordance with International Standards on Auditing.

1
ISA 210, “Agreeing the Terms of Audit Engagements.”
2
The sub-title “Report on the Financial Statements” is unnecessary in circumstances when the second
sub-title “Report on Other Legal and Regulatory Requirements” is not applicable.
3
Or other term that is appropriate in the context of the legal framework in the particular jurisdiction.
4
Where management’s responsibility is to prepare financial statements that give a true and fair view,
this may read: “Management is responsible for the preparation of financial statements that give a
true and fair view in accordance with International Financial Reporting Standards, and for such ...”

697 ISA 705 APPENDIX


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation5 of the
financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the entity’s internal control.6 An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our qualified audit opinion.

Basis for Qualified Opinion


The company’s inventories are carried in the statement of financial position at xxx.
Management has not stated the inventories at the lower of cost and net realizable value
but has stated them solely at cost, which constitutes a departure from International
Financial Reporting Standards. The company’s records indicate that had management
stated the inventories at the lower of cost and net realizable value, an amount of xxx
would have been required to write the inventories down to their net realizable value.
Accordingly, cost of sales would have been increased by xxx, and income tax, net income
and shareholders’ equity would have been reduced by xxx, xxx and xxx, respectively.

Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for
Qualified Opinion paragraph, the financial statements present fairly, in all material
respects, (or give a true and fair view of) the financial position of ABC Company as
at December 31, 20X1, and (of) its financial performance and its cash flows for the
year then ended in accordance with International Financial Reporting Standards.

5
In the case of footnote 12, this may read: “In making those risk assessments, the auditor considers
internal control relevant to the entity’s preparation of financial statements that give a true and fair
view in order to design audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the entity’s internal control.”
6
In circumstances when the auditor also has responsibility to express an opinion on the effectiveness
of internal control in conjunction with the audit of the financial statements, this sentence would be
worded as follows: “In making those risk assessments, the auditor considers internal control relevant
to the entity’s preparation and fair presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances.” In the case of footnote 12, this may read: “In
making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation of financial statements that give a true and fair view in order to design audit procedures
that are appropriate in the circumstances.”

ISA 705 APPENDIX 698


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Report on Other Legal and Regulatory Requirements


[Form and content of this section of the auditor’s report will vary depending on the
nature of the auditor’s other reporting responsibilities.]
[Auditor’s signature]
[Date of the auditor’s report]
[Auditor’s address]

AUDITING

699 ISA 705 APPENDIX


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Illustration 2:
Circumstances include the following:
• Audit of consolidated general purpose financial statements prepared by
management of the parent in accordance with International Financial
Reporting Standards.
• The terms of the audit engagement reflect the description of
management’s responsibility for the financial statements in ISA 210.
• The financial statements are materially misstated due to the non-
consolidation of a subsidiary. The material misstatement is deemed to
be pervasive to the financial statements. The effects of the misstatement
on the financial statements have not been determined because it was not
practicable to do so.
• In addition to the audit of the consolidated financial statements, the
auditor has other reporting responsibilities required under local law.

INDEPENDENT AUDITOR’S REPORT


[Appropriate Addressee]
Report on the Consolidated Financial Statements7
We have audited the accompanying consolidated financial statements of ABC
Company and its subsidiaries, which comprise the consolidated statement of
financial position as at December 31, 20X1, and the consolidated statement of
comprehensive income, statement of changes in equity and statement of cash flows
for the year then ended, and a summary of significant accounting policies and other
explanatory information.

Management’s8 Responsibility for the Consolidated Financial Statements


Management is responsible for the preparation and fair presentation of these
consolidated financial statements in accordance with International Financial
Reporting Standards,9 and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.

7
The sub-title “Report on the Consolidated Financial Statements” is unnecessary in circumstances
when the second sub-title “Report on Other Legal and Regulatory Requirements” is not applicable.
8
Or other term that is appropriate in the context of the legal framework in the particular jurisdiction.
9
Where management’s responsibility is to prepare consolidated financial statements that give a true
and fair view, this may read: “Management is responsible for the preparation of consolidated
financial statements that give a true and fair view in accordance with International Financial
Reporting Standards, and for such ...”

ISA 705 APPENDIX 700


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements
based on our audit. We conducted our audit in accordance with International
Standards on Auditing. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the consolidated financial statements. The procedures selected
depend on the auditor’s judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In
making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation10 of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal
control.11 An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our adverse audit opinion.

Basis for Adverse Opinion


As explained in Note X, the company has not consolidated the financial statements
of subsidiary XYZ Company it acquired during 20X1 because it has not yet been
able to ascertain the fair values of certain of the subsidiary’s material assets and
liabilities at the acquisition date. This investment is therefore accounted for on a cost
basis. Under International Financial Reporting Standards, the subsidiary should have
been consolidated because it is controlled by the company. Had XYZ been
consolidated, many elements in the accompanying financial statements would have

AUDITING
been materially affected. The effects on the consolidated financial statements of the
failure to consolidate have not been determined.

10
In the case of footnote 17, this may read: “In making those risk assessments, the auditor considers
internal control relevant to the entity’s preparation of consolidated financial statements that give a
true and fair view in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.”
11
In circumstances when the auditor also has responsibility to express an opinion on the effectiveness
of internal control in conjunction with the audit of the consolidated financial statements, this
sentence would be worded as follows: “In making those risk assessments, the auditor considers
internal control relevant to the entity’s preparation and fair presentation of the consolidated financial
statements in order to design audit procedures that are appropriate in the circumstances.” In the case
of footnote 17, this may read: “In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation of consolidated financial statements that give a true and
fair view in order to design audit procedures that are appropriate in the circumstances.”

701 ISA 705 APPENDIX


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for
Adverse Opinion paragraph, the consolidated financial statements do not present
fairly (or do not give a true and fair view of) the financial position of ABC Company
and its subsidiaries as at December 31, 20X1, and (of) their financial performance
and their cash flows for the year then ended in accordance with International
Financial Reporting Standards.

Report on Other Legal and Regulatory Requirements


[Form and content of this section of the auditor’s report will vary depending on the
nature of the auditor’s other reporting responsibilities.]
[Auditor’s signature]
[Date of the auditor’s report]
[Auditor’s address]

ISA 705 APPENDIX 702


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Illustration 3:
Circumstances include the following:
• Audit of a complete set of general purpose financial statements
prepared by management of the entity in accordance with International
Financial Reporting Standards.
• The terms of the audit engagement reflect the description of
management’s responsibility for the financial statements in ISA 210.
• The auditor was unable to obtain sufficient appropriate audit evidence
regarding an investment in a foreign affiliate. The possible effects of the
inability to obtain sufficient appropriate audit evidence are deemed to
be material but not pervasive to the financial statements.
• In addition to the audit of the financial statements, the auditor has other
reporting responsibilities required under local law.

INDEPENDENT AUDITOR’S REPORT


[Appropriate Addressee]
Report on the Financial Statements12
We have audited the accompanying financial statements of ABC Company, which
comprise the statement of financial position as at December 31, 20X1, and the
statement of comprehensive income, statement of changes in equity and statement of
cash flows for the year then ended, and a summary of significant accounting policies
and other explanatory information.

Management’s13 Responsibility for the Financial Statements

AUDITING
Management is responsible for the preparation and fair presentation of these
financial statements in accordance with International Financial Reporting
Standards,14 and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our
audit. We conducted our audit in accordance with International Standards on Auditing.

12
The sub-title “Report on the Financial Statements” is unnecessary in circumstances when the second
sub-title “Report on Other Legal and Regulatory Requirements” is not applicable.
13
Or other term that is appropriate in the context of the legal framework in the particular jurisdiction.
14
Where management’s responsibility is to prepare financial statements that give a true and fair view,
this may read: “Management is responsible for the preparation of financial statements that give a
true and fair view in accordance with International Financial Reporting Standards, and for such ...”

703 ISA 705 APPENDIX


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation
and fair presentation15 of the financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control.16 An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our qualified audit opinion.

Basis for Qualified Opinion


ABC Company’s investment in XYZ Company, a foreign associate acquired during
the year and accounted for by the equity method, is carried at xxx on the statement of
financial position as at December 31, 20X1, and ABC’s share of XYZ’s net income
of xxx is included in ABC’s income for the year then ended. We were unable to
obtain sufficient appropriate audit evidence about the carrying amount of ABC’s
investment in XYZ as at December 31, 20X1 and ABC’s share of XYZ’s net income
for the year because we were denied access to the financial information,
management, and the auditors of XYZ. Consequently, we were unable to determine
whether any adjustments to these amounts were necessary.

Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for
Qualified Opinion paragraph, the financial statements present fairly, in all material

15
In the case of footnote 22, this may read: “In making those risk assessments, the auditor considers
internal control relevant to the entity’s preparation of financial statements that give a true and fair
view in order to design audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the entity’s internal control.”
16
In circumstances when the auditor also has responsibility to express an opinion on the effectiveness
of internal control in conjunction with the audit of the financial statements, this sentence would be
worded as follows: “In making those risk assessments, the auditor considers internal control relevant
to the entity’s preparation and fair presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances.” In the case of footnote 22, this may read: “In
making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation of financial statements that give a true and fair view in order to design audit procedures
that are appropriate in the circumstances.”

ISA 705 APPENDIX 704


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

respects, (or give a true and fair view of) the financial position of ABC Company as
at December 31, 20X1, and (of) its financial performance and its cash flows for the
year then ended in accordance with International Financial Reporting Standards.

Report on Other Legal and Regulatory Requirements


[Form and content of this section of the auditor’s report will vary depending on the
nature of the auditor’s other reporting responsibilities.]
[Auditor’s signature]
[Date of the auditor’s report]
[Auditor’s address]

AUDITING

705 ISA 705 APPENDIX


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Illustration 4:
Circumstances include the following:
• Audit of a complete set of general purpose financial statements
prepared by management of the entity in accordance with International
Financial Reporting Standards.
• The terms of the audit engagement reflect the description of
management’s responsibility for the financial statements in ISA 210.
• The auditor was unable to obtain sufficient appropriate audit evidence
about a single element of the financial statements. That is, the auditor
was also unable to obtain audit evidence about the financial information
of a joint venture investment that represents over 90% of the
company’s net assets. The possible effects of this inability to obtain
sufficient appropriate audit evidence are deemed to be both material
and pervasive to the financial statements.
• In addition to the audit of the financial statements, the auditor has other
reporting responsibilities required under local law.

INDEPENDENT AUDITOR’S REPORT


[Appropriate Addressee]
Report on the Financial Statements17
We were engaged to audit the accompanying financial statements of ABC Company,
which comprise the statement of financial position as at December 31, 20X1, and the
statement of comprehensive income, statement of changes in equity and statement of
cash flows for the year then ended, and a summary of significant accounting policies
and other explanatory information.

Management’s18 Responsibility for the Financial Statements


Management is responsible for the preparation and fair presentation of these
financial statements in accordance with International Financial Reporting
Standards,19 and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.

17
The sub-title “Report on the Financial Statements” is unnecessary in circumstances when the second
sub-title “Report on Other Legal and Regulatory Requirements” is not applicable.
18
Or other term that is appropriate in the context of the legal framework in the particular jurisdiction.
19
Where management’s responsibility is to prepare financial statements that give a true and fair view,
this may read: “Management is responsible for the preparation of financial statements that give a
true and fair view in accordance with International Financial Reporting Standards, and for such …”

ISA 705 APPENDIX 706


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on
conducting the audit in accordance with International Standards on Auditing.
Because of the matter described in the Basis for Disclaimer of Opinion paragraph,
however, we were not able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion.

Basis for Disclaimer of Opinion


The company’s investment in its joint venture XYZ (Country X) Company is carried
at xxx on the company’s statement of financial position, which represents over 90%
of the company’s net assets as at December 31, 20X1. We were not allowed access to
the management and the auditors of XYZ, including XYZ’s auditors’ audit
documentation. As a result, we were unable to determine whether any adjustments
were necessary in respect of the company’s proportional share of XYZ’s assets that it
controls jointly, its proportional share of XYZ’s liabilities for which it is jointly
responsible, its proportional share of XYZ’s income and expenses for the year, and
the elements making up the statement of changes in equity and cash flow statement.

Disclaimer of Opinion
Because of the significance of the matter described in the Basis for Disclaimer of
Opinion paragraph, we have not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion. Accordingly, we do not express an
opinion on the financial statements.

Report on Other Legal and Regulatory Requirements


[Form and content of this section of the auditor’s report will vary depending on the
nature of the auditor’s other reporting responsibilities.]
[Auditor’s signature]

AUDITING
[Date of the auditor’s report]
[Auditor’s address]

707 ISA 705 APPENDIX


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Illustration 5:
Circumstances include the following:
• Audit of a complete set of general purpose financial statements
prepared by management of the entity in accordance with International
Financial Reporting Standards.
• The terms of the audit engagement reflect the description of
management’s responsibility for the financial statements in ISA 210.
• The auditor was unable to obtain sufficient appropriate audit evidence
about multiple elements of the financial statements. That is, the auditor
was unable to obtain audit evidence about the entity’s inventories and
accounts receivable. The possible effects of this inability to obtain
sufficient appropriate audit evidence are deemed to be both material
and pervasive to the financial statements.
• In addition to the audit of the financial statements, the auditor has other
reporting responsibilities required under local law.

INDEPENDENT AUDITOR’S REPORT


[Appropriate Addressee]
Report on the Financial Statements20
We were engaged to audit the accompanying financial statements of ABC Company,
which comprise the statement of financial position as at December 31, 20X1, and the
statement of comprehensive income, statement of changes in equity and statement of
cash flows for the year then ended, and a summary of significant accounting policies
and other explanatory information.

Management’s21 Responsibility for the Financial Statements


Management is responsible for the preparation and fair presentation of these
financial statements in accordance with International Financial Reporting
Standards,22 and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.

20
The sub-title “Report on the Financial Statements” is unnecessary in circumstances when the second
sub-title “Report on Other Legal and Regulatory Requirements” is not applicable.
21
Or other term that is appropriate in the context of the legal framework in the particular jurisdiction.
22
Where management’s responsibility is to prepare financial statements that give a true and fair view,
this may read: “Management is responsible for the preparation of financial statements that give a
true and fair view in accordance with International Financial Reporting Standards, and for such …”

ISA 705 APPENDIX 708


MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on
conducting the audit in accordance with International Standards on Auditing.
Because of the matters described in the Basis for Disclaimer of Opinion paragraph,
however, we were not able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion.

Basis for Disclaimer of Opinion


We were not appointed as auditors of the company until after December 31, 20X1
and thus did not observe the counting of physical inventories at the beginning and
end of the year. We were unable to satisfy ourselves by alternative means concerning
the inventory quantities held at December 31, 20X0 and 20X1 which are stated in the
statement of financial position at xxx and xxx, respectively. In addition, the
introduction of a new computerized accounts receivable system in September 20X1
resulted in numerous errors in accounts receivable. As of the date of our audit report,
management was still in the process of rectifying the system deficiencies and
correcting the errors. We were unable to confirm or verify by alternative means
accounts receivable included in the statement of financial position at a total amount
of xxx as at December 31, 20X1. As a result of these matters, we were unable to
determine whether any adjustments might have been found necessary in respect of
recorded or unrecorded inventories and accounts receivable, and the elements
making up the statement of comprehensive income, statement of changes in equity
and statement of cash flows.

Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of
Opinion paragraph, we have not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion. Accordingly, we do not express an

AUDITING
opinion on the financial statements.

Report on Other Legal and Regulatory Requirements


[Form and content of this section of the auditor’s report will vary depending on the
nature of the auditor’s other reporting responsibilities.]
[Auditor’s signature]
[Date of the auditor’s report]
[Auditor’s address]

709 ISA 705 APPENDIX